Preliminary results for 52 weeks ended 24 Feb 2018

26 April 2018

Morses Club PLC

Preliminary results for the 52 weeks ended 24 February 2018

Morses Club PLC ("the Company", "Morses Club" or "the Group"), the UK's second largest home collected credit ("HCC") lender, is pleased to announce its preliminary results for the 52 weeks ended 24 February 2018.

Financial Highlights

· Continued strong performance with revenue up 17.1% to £116.6m (FY17: £99.6m)

· Adjusted profit before tax increased by 8.5% to £19.2m (FY17: £17.7m); reported profit before tax increased by 44.6% to £16.2m (FY17: £11.2m)

· Total credit issued increased by 21% to £174.4m (FY17: £144.1m), driven primarily by new territory builds

· Net loan book growth of 19% to £72.8m (FY17: £61.2m)

· Impairment as a percentage of revenue for the period was 26.1% (FY17: 24.4%), remaining within our target range

· A 6% increase in customer numbers to 229,000 (FY17: 216,000)

· Secured additional funding in August 2017 to increase overall revolving facility from £25m to £40m

· Adjusted EPS increased by 8% to 11.7p (FY17: 10.8p); Basic EPS increased by 53% to 10.1p (FY17: 6.6p)

· Proposed final dividend of 4.8p (FY17: 4.3p)

Operational Highlights

· Recruitment of c. 600 agents and managers during the year, which translated into 463 territory builds in FY18

· 21,000 Morses Club Card customers, with £10.6m in loan balances (FY17: £3.9m)

· Technology continues to enhance Morses Club's offering, improving customer experience, driving efficiencies and productivity gains and supporting diversification into complementary product areas

· Received full Financial Conduct Authority ("FCA") authorisation

Alternative Performance Measures & Key performance indicators

¹ Definitions are set out in the Glossary of Alternative performance measures 

Paul Smith, Chief Executive Officer of Morses Club, commented:

"We are very pleased to report that FY18 was an even stronger year for Morses Club, reflecting our continued success in serving our core HCC market, delivering good customer outcomes and careful implementation of our prudent credit policy. We have seen 19% growth in our loan book whilst keeping our impairments within our guidance range, testament to our focus on high quality lending.

"Our advanced digital platform has improved customer experience and streamlined the lending process, reducing our operating cost ratio and enhancing regulatory compliance. Technology has also enabled us to expand our product offering to provide customers with the flexibility they desire, as well as access a new customer base in the wider non-standard credit market.

"During the year, we have remained committed to our strategy of growing sustainably and focused on integrating new agents into the business. We are excited for the coming year as we look to further strengthen our core business, whilst also developing our complementary product offering."

Alternative Performance Measures

In reporting financial information, the Group presents alternative performance measures, 'APMs' which are not defined or specified under the requirements of IFRS.

The Group believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. The APMs are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these measures are also used for the purpose of setting remuneration targets.

Each of the APMs used is set out in the glossary at the back of this statement.

The Group makes certain adjustments to the statutory measures in order to derive APMs where relevant. The Group's policy is to exclude items that are considered to be significant in both nature and/or quantum and where treatment as an adjusted item provides stakeholders with additional useful information to assess the year-on-year trading performance of the Group.

Forward looking statements

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". By their nature, forward-looking statements involve known and unknown risks and uncertainties since they relate to future events and circumstances. Actual results may, and often do, differ materially from any forward-looking statements.

Any forward-looking statements in this announcement reflect Morses Club's view with respect to future events as at the date of this announcement. Save as required by law or by the AIM Rules for Companies, Morses Club undertakes no obligation to publicly revise any forward-looking statements in this announcement following any change in its expectations or to reflect events or circumstances after the date of this announcement.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (MAR).

For further information please contact:

Analyst presentation

There will be an analyst presentation to discuss the results at 9.30 a.m. today at Panmure Gordon, 1 New Change, London, EC4M 9AF.

Those analysts wishing to attend are asked to contact Mercedes Goldman at Camarco on +44 (0) 20 3757 4996 or [email protected].

Notes to Editors

About Morses Club

Morses Club is the second largest UK Home Collected Credit (HCC) lender with 229,000 customers and 2,030 agents across 98 locations throughout the UK.

The Company offers a range of loan products to its customers through its extensive self-employed agent network. The majority of the Company's borrowers are repeat customers and the Company enjoys consistently high customer satisfaction with scores of 95% or above.

The Company is using technology to broaden its offering and provide new products to ensure customers can access credit with the flexibility they require. In April 2016, its cashless lending product, the Morses Club Card, was introduced, enabling its customers to buy online as well as on the high street. Dot Dot Loans, the Company's first online instalment product, was launched in March 2017.

Morses Club successfully listed on AIM in May 2016.

About the UK non-standard credit market

The UK non-standard credit market, of which UK HCC is a subset, consists of both secured and unsecured lending and is estimated to comprise around 10 million consumers.

Non-standard credit is the provision of secured and unsecured credit to consumers other than through mainstream lenders. Lenders providing non-standard credit principally lend on an unsecured basis and the market is characterised by high frequency borrowing.

Since February 2014, unsecured personal lending has grown from £161 billion to £209 billion in February 2018².

² Source : Table J Bank of England Money & Credit Report February 2018

About UK Home Collected Credit

UK HCC is considered to be a specialised segment of the broader UK non-standard credit market. UK HCC loans are typically small, unsecured cash loans delivered directly to customers' homes. Repayments are collected in person during weekly follow-up visits to customers' homes.

UK HCC is considered to be stable and well-established, with approximately 1.6 million3 people using the services of UK HCC lenders.

3 High Cost Credit Review ANNEX 1 - July 2017

Chief Executive's Statement

Performance 

Performance during the period was strong and in line with market expectations. Revenue grew by 17.1% to reach £116.6m (FY17: £99.6m) and total credit issued increased by 21% to £174.4m, with new territory builds and core business growth the principal drivers.

Customer numbers reached 229,000, an increase of 6% relative to the previous year (FY17: 216,000). The proportion of our gross receivables represented by our highest performing customers increased by 18.0%, further demonstrating our focus on building a high quality customer base.

At 26.1% of revenue (FY17: 24.4%), our impairments for the period were in line with our original forecasts in spite of the growth we achieved over the period.

The year also saw a reduction in our operating cost ratio relative to last year, driven by technology.

As announced in August 2017, our revolving credit facility increased from £25m to £40m with the addition of a high street lender to sit alongside our existing funder, Shawbrook Bank, and the facility has been extended to August 2020.

Strategic Growth Initiatives

We remain very much focused on our core home collected credit (HCC) business, and serving our customers in the traditional manner via our network of self-employed agents, as we believe this is the most appropriate way to serve customers in this part of the market. We have a 14.6%4 share of the known traditional market. Our primary objective remains to strengthen our home collected credit business, to make it more efficient and profitable, seeking growth via acquisition as well as by organic means.

In addition, we are looking to grow in attractive areas that are complementary to our core business. Our growth initiatives are built on our thorough understanding of the market, the depth of our experience in home collected credit and our close relationships with customers.

Our strategy is based on a balance between our experience and prudent approach to lending, allied with diversification and technology. Whilst we recognise and respect the heritage of the business, we are striving to balance tradition with the modern-day needs of our customers. Our customer and people-centric approach means that we seek to remain relevant to our customers thus retaining their loyalty.

4 Market share based on 1.6 million people who regularly borrow using HCC

Territory Builds

We recruited c. 600 agents and managers during the year, capitalising on the unique opportunity presented in the market. After filling vacancies, this translated into 463 territory builds in FY18. Despite this attractive opportunity, we did not lose sight of the need to grow in a controlled manner. We applied stringent criteria in our selection of agents, and were careful not to cause operational disruption to the core business.

Bringing on new agents with contacts in the communities they serve is the most efficient way to access high quality loan books and loyal customers. This is reflected in the proportion of loans attributable to the best paying customers, which increased by 18% (FY17: 10%).

Initial subsidies to maintain agents' income during their first year means that it can take up to 12 months for territory builds to become profitable as agents build up their loan books. Agents recruited in the financial year primarily joined us in July and August 2017 and are largely performing ahead of expectations.

Product Development

Customer satisfaction is at the heart of our model, critical as it is both to customer retention and word-of-mouth recommendations, an important source of organic growth. We are proud that the customer satisfaction rating independently measured every month was 95% or above. As well as tracking satisfaction and identifying areas to improve, these monthly surveys also yield crucial insights into what customers would like to see as part of our proposition.

Grounded firmly in our core business, we have continued investment to enhance our offer in line with evolving customer needs and to keep Morses Club at the forefront of the HCC and wider non-standard credit sectors.

Launched in 2016 and the only current cashless card in the mainstream sector, the Morses Club Card enables customers to make purchases online as well as on the high street. Interest in the card continues to grow, with over 21,000 customers and over £10.6m in loan balances, an increase of 172% from FY17.

Through our close contact with customers in our regular surveys as well as millions of face-to-face meetings with people at their homes, we have seen an increasing interest in digital communications and digitally based products. The significant investment we have made in our technology platform now enables us to develop our digital offering to give customers the products and communication channels they tell us they want. Initiatives such as digital customer acquisition routes and the recent launch of our customer portal in a test phase are not designed to supplant customer relationships with the agent, but rather are moves to enhance the customer experience in an increasingly digitised world.

In March 2017, we launched our online instalment product, Dot Dot Loans, with a view to testing the market and optimising the proposition for online customers. Dot Dot Loans provides a significant opportunity to access a different segment of the non-standard credit market; the 1.6m people accessing the HCC market, and there are a further 8-9m non-standard credit consumers using other products and services. Following the opportunity to add a large number of territory builds to our business during the year, management decided to prioritise resource to our core business. Attention will turn back to Dot Dot Loans in 2018/19, both for organic growth of the platform and also prospective non-standard credit acquisitions. We are taking a conservative approach to growth, however, and will use this extended test phase to make sure that our solutions work for customers and are in line with our risk appetite.

We see the investment in our customer service platforms and our wider technology as relevant to our strategic journey to serve other parts of the non-standard credit market. We are focused on broadening our offering in areas where our customers have identified a need for more flexible and attractive products. We are continuing to invest in development to take us into these adjacent markets, as well as evaluating suitable acquisition targets to accelerate our journey. Our long-term strategy is based on enhancing the offering to our customers to increase loyalty.

Efficiency Initiatives

Technology has also enabled us to automate processes and eliminate paperwork. This frees up agents to concentrate on customer service and to serve more customers, whilst also enhancing our compliance performance and streamlining our operational cost base. Management data is now integrated onto a single platform, and a full affordability platform was embedded during the year, capturing evidence of income and linked to Credit Reference Agencies, to ensure that any loan offered to a customer is affordable.

We see further scope for technology to provide efficiency gains. 

Market Developments

In May 2017, Morses Club received full Financial Conduct Authority (FCA) authorisation, following a period of operating under interim permission. We consider ourselves to be well developed regarding regulatory compliance developments, supported by technology. We believe that smaller home collected credit firms may seek to exit the market as they begin to struggle to keep pace with the FCA demands on technology and auditability, which will create opportunities for us to continue loan book acquisition.

From a regulatory perspective, the FCA has been conducting surveys into home collected credit, as well as the rent-to-own and catalogue sectors, and is evaluating affordability and repeat lending for the review of HCSTC (high cost short-term credit), which is due to be published in May 2018. The technology developments launched in the past year, which will be further enhanced in the coming year, are designed to evidence good customer outcomes. We continue to have open and positive dialogue with the regulator.

In these times of uncertainty surrounding the outcome of ongoing Brexit negotiations, it is worth pointing out that we are based solely in the UK, and our market has been demonstrably recession-proof, as evidenced by the growth we have seen throughout our 130-year history.

People

There have not been any changes at Board or strategic executive level during the period. The team continues to deliver our long-term strategic vision, and comprises a cross-functional skillset from different sectors.

The inherently collaborative approach among senior management extends throughout the culture of the organisation and is a key factor in our increasingly high levels of employee engagement (In our 2017 survey 75% of employees reported being satisfied with Morses Club, up from 55% in 2015). In addition, we conduct an annual agent satisfaction survey, with overall satisfaction results being 77% (up from 70% in 2016) and our agency vacancy rates are currently trending at less than 3%.

All of our staff members, subject to the qualifying criteria, are eligible to participate in the Company's share bonus scheme, helping to align employee and Company performance.

The strong performance of the business and high levels of customer, agent and employee satisfaction would not be possible without the dedication of all of the people who work for and with Morses Club, who share our vision, values and commitment to treating customers fairly.

Dividend

The Board is delighted to declare a final dividend of 4.8p per share (FY17: 4.3p), subject to shareholder approval. The full year dividend is therefore 7.0p (FY17: 6.4p).

The dividend of 4.8p per share will be paid on 27 July 2018 to ordinary shareholders on the register at the close of business on 29 June 2018.

Outlook

We have had a positive start to our next financial year and as such, we are confident in our outlook, as we seek to further strengthen our position in our core HCC market, whilst also diversifying our offering into complementary areas. Our investment in technology will continue to improve operational efficiencies and allow us to serve our customers in more flexible ways.

We remain well positioned for growth and believe that as the market continues to develop, in light of potential regulatory change and customer demand, this provides opportunities for further acquisitions both in our core HCC market and wider markets.

Paul SmithChief Executive OfficerDate: 26 April 2018

Chief Financial Officer's Operational and Financial Review

Overview

The results for the Group for the 52 weeks ended 24 February 2018 continue to demonstrate how we are able to grow the business, invest in the up-front costs of building new territories and still deliver improved earnings. As a result we delivered year on year sales growth of 21.0%, revenue growth of 17.1% and an increase in adjusted profit before tax of 8.5%. Statutory profit before tax grew by 44.6%.

The impairment charge as a percentage of revenue for the year was 26.1%. This is higher than the 24.4% reported for last year but still within our guidance range of 22% to 27%, and lower than the 26.6% reported at the half year. Our guidance range was set in 2016 for lower levels of sales growth, and the fact that the impairment figure remains within the range despite 21% growth in credit issued demonstrates the priority we continue to place on quality of lending.

Net tangible assets (net assets less intangible assets arising from acquisitions) increased by 12.8% to £61.5m with net receivables increasing by 19.0% to £72.8m.

Group Results 

Sales to customers for the year increased by 21.0% to £174.4m (FY17: £144.1m), with this growth attributable to the increased level of new territory builds, as no acquisitions were made during the period. In light of the territory build opportunity, we reduced spend on other lead sources for the recruitment of home collected credit customers to maximise the investment opportunity. We estimate that this change in focus reduced credit issued on a like for like basis by £2.8m and resulted in up to 3,500 fewer customers at the year end. However, we believe that the resulting cost savings and lower impairments more than offset any reduction in income.

Revenue increased by 17.1% to £116.6m (FY17: £99.6m), with gross profit increasing by 10.0% to £58.2m (FY17: £52.9m). Agent commission as a percentage of revenue reduced from 21.3% in FY17 to 20.2% in FY18, reflecting the changes in the operating model.

Whilst impairment increased from 24.4% of revenue in FY17 to 26.1% in FY18, this remains within our guidance range of 22% to 27%. The guidance range was set with a lower level of growth in credit issued in mind, which is relevant because the faster a loan book and lending increases, the more adverse the impact is likely to be on impairment as a percentage of revenue. Encouragingly, impairment in the second half year was down to 25.6% from the 26.6% reported in the first half of the year as debt repayment performance exceeded our projections. Impairment as a percentage of credit issued was 17.4% in FY18, a slight uplift on the 16.9% reported for FY17.

Gross profit before territory build subsidies increased by 15.9% from £54.1m in FY17 to £62.7m in FY18. Territory builds increased to 463 in FY18 compared to 186 in FY17, with the cost of the agent subsidies increasing to £4.5m in FY18 from £1.2m in FY17. In addition, 25 of the FY17 territory builds occurred in the last two weeks of that year and so the majority of their costs were incurred in FY18.

After the territory build subsidies are taken into account, gross profit increased by 10.0% to £58.2m (FY17: £52.9m).

Administration expenses increased from £34.3m in FY17 to £37.6m in FY18, reflecting not only the increased field infrastructure to support the business growth but also the costs associated with the development of the Dot Dot Loans on-line product, increased investment in our IT infrastructure and additional compliance costs. However, the administration expenses as a percentage of revenue fell from 34.4% in FY17 to 32.3% in FY18, an efficiency gain of 6.1%, driven by the productivity gains achieved from the implementation of technology improvements.

The adjusted profit before tax increased to £19.2m from £17.7m last year, an improvement of 8.5%. The statutory profit before tax improved to £16.1m from £11.2m last year, an increase of 43.8%. This increase was boosted by the reduced amortisation of acquisition intangibles, and non-recurrence of the £2.2m IPO costs recognised in FY17.

A table of adjustments between reported profit before tax and adjusted profit before tax is shown below.

For illustrative purposes, the table below also shows the improvement in the core home collected credit business excluding the development costs in Dot Dot Loans and the investment costs in the new territory builds. On this basis the underlying performance of the core home collected credit business improved by 29.1%.

The amortisation of intangible assets reflects the unwinding of intangibles in connection with acquisitions. This reduction is a result of both the lack of acquisitions in the current year and reduced levels of amortisation in connection with prior year acquisitions. Intangible assets are amortised over the asset's useful economic life, which is based on the expected life of the acquired customer relationships. Due to the behavioural profile of our customers, this will naturally result in a greater amortisation charge in the early years with a corresponding reduction in later years.

Other non-operating costs relate primarily to non-recurring restructuring costs of the business and were higher in FY18 as a result of restructuring costs in operations.

Earnings Per Share 

The adjusted earnings per share for FY18 is 11.7p, an increase of 8% relative to the 10.8p for FY17.

The basic reported earnings per share for FY18 is 10.1p compared to 6.6p for FY17, an increase of 53%.

Dividend 

Subject to shareholder approval at the Annual General Meeting on 26 June 2018, the Board proposes to pay a final dividend of 4.8p per ordinary share (FY17: 4.3p) payable on 27 July 2018 to shareholders on the register at the close of business on 29 June 2018.

This payment is in addition to the interim dividend already paid of 2.2p per ordinary share, making a total dividend for the year of 7.0p (FY17: 6.4p). The continued high level of dividend payments reflects the Board's confidence in the business prospects, particularly the opportunity to create further growth from historic territory builds, and our commitment to provide a strong income yield to our shareholders.

Net Margin 

The adjusted net margin, which excludes amortisation of intangibles on acquisitions, the one-off costs of the IPO and other non-operating costs, decreased to 16.5% from 17.8% last year, due to the impact of the cost of the territory builds. The cost of the territory builds impacted margins by 3.9% in FY18 against only 1.2% in FY17. Without this 2.7% adverse impact, the adjusted net margin would have shown a favourable improvement of 1.4% rather than the decline of 1.3%.

The net margin for the period increased to 13.9% from 11.2% last year, driven by several factors: the non-recurrence of the one-off IPO costs of £2.2m, the reduction in the amortisation of intangibles on acquisitions charge (which reduced to £1.9m from £3.7m last year as a result of there being no new acquisitions in FY18) and the lower write downs on prior year acquisitions. These favourable movements more than offset the adverse movement in the adjusted net margin.

Acquisitions and Goodwill 

There were no new acquisitions in the current accounting period, reflecting our focus on embedding the agents that joined us during the year. However the Group will continue to evaluate acquisitions in both the home collected credit market and other related non-prime sectors.

Funding 

We were pleased to announce in August 2017 that we had increased our debt facility from £25m to £40m, with a major high street bank joining the existing facility we had in place with Shawbrook Bank. The expiry date of the facility was also extended from March 2019 to August 2020.

The current facility is sufficient to meet our immediate strategic objectives, with the peak drawdown this year being £28.0m in December 2017. We remain focussed on seeking to increase our gearing in order to maximise equity returns, but not to a degree that we feel that we are putting the Group at a significantly higher level of financial risk.

Balance Sheet 

The total equity for the Group increased by 7.2% from £61.4m to £66.5m, reflecting the proportion of profits that we retain for future expansion.

The main asset of the Group is our loan book, which on a net basis increased by 19% from £61.2m last year to £72.8m in FY18. This increase was in part funded by our closing debt position, which increased to £16.0m from £10.0m over the same period. This increase of 19% was greater than the increase in gross loan book of 12% due to the improved quality of our customers reducing the relative impairment provision.

IFRS 9 

IFRS 9 'Financial instruments' is effective from 1 January 2018 and replaces IAS 39 'Financial instruments: Recognition and measurement'. The standard has been applied prospectively and prior year comparatives will not be restated.

IFRS 9 requires the recognition of impairment on customer receivables through an expected loss model. Impairment provisions are therefore recognised on inception of a loan based on the probability of default and the typical loss given default. This differs from the current incurred loss model under IAS 39, where the requirement is that impairment provisions are only reflected when there is objective evidence of impairment.

However, for home collected credit businesses (HCC) the application of IAS 39 was conceptually difficult as the nature of our product is that customers will, from time to time, miss a payment and, up to a level, we are comfortable with this. Indeed, we apply no additional charges associated with missed payments and are proud of this aspect of forbearance in our products.

The Group has performed a preliminary assessment of the potential impact of adopting IFRS 9 based on the financial instruments as at the date of initial application of IFRS 9 (25 February 2018). IFRS 9 prescribes: (i) classification and measurement of financial instruments; (ii) expected loss accounting for impairment, and (ii) hedge accounting.

No changes are expected to the classification and measurement of the Company's assets, liabilities or equity nor does the company adopt hedge accounting. The only area which materially affects the Group is expected loss accounting for impairment. Under this approach, greater impairment provisions are recognised on inception of a loan based on the probability of default and the typical loss given default.

Provisions are calculated based on an unbiased outcome which take into account historic performance and considers the outlook for macro-economic conditions.

The impairment approach under IFRS 9 differs from the current incurred loss model under IAS 39 where impairment provisions are only reflected when there is objective evidence of impairment, typically a missed payment. The resulting effect is that impairment provisions under IFRS 9 are recognised earlier. This will result in a one-off adjustment to receivables, deferred tax and reserves on adoption and will result in delayed recognition of profits.

Based on current estimates, the adoption of IFRS 9 results in a reduction in the net loan book as at 24 February 2018 of between 4% and 6%.

Despite the adjustments required to receivables and net assets, it is important to note that IFRS 9 only changes the timing of profits made on a loan. The Group's underwriting and scorecards will be unaffected by the change in accounting, the ultimate profitability of loan is the same under both IAS 39 and IFRS 9 and more fundamentally the cash flows and capital generation over the life of a loan remain unchanged. The Group's bank covenants are unaffected by IFRS 9, as they are based on accounting standards in place at the time they were set.

Cash Flow 

The simplified cash flow statement below demonstrates the healthy levels of cash generated by the business prior to re-investment in the loan book asset of £22.9m (FY17: £15.7m).

It also shows how loan book growth in FY18 was primarily through the organic territory builds £11.6m (FY17: £4.9m) whereas last year's growth was a mix of organic growth and acquisitions.

Summary cash flow

Principal Risks and Uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Company's performance. A full explanation of the Group's principal risks and mitigants are included in the Annual report. The Company's principal risks are:

Andy ThomsonChief Financial Officer

Date: 26 April 2018

MORSES CLUB PLC

CONSOLIDATED INCOME STATEMENT

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

All results derive from continuing operations. A Statement of Comprehensive Income is not included as there are no other gains or losses, other than those presented in the Income Statement.

MORSES CLUB PLC Registered Number: 06793980

CONSOLIDATED BALANCE SHEET

AS AT 24 February 2018

MORSES CLUB PLC

STATEMENTS OF CHANGES IN EQUITY

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

MORSES CLUB PLC

CASH FLOW STATEMENTS

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

MORSES CLUB PLC

NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

MORSES CLUB PLC

NOTES TO THE PRELIMINARY RESULTS

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

1. BASIS OF PREPARATION

General information

The preliminary announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the consolidated financial statements for the period ended 24 February 2018 which have been prepared under IFRS as adopted by the European and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The accounting policies applied in preparing the preliminary announcement are consistent with those used in preparing the statutory financial statements for the year ended 25 February 2017.

Shopacheck Financial Services Limited and Shelby Finance Limited both qualify for an exemption to audit under the requirements of Section 479A of the Companies Act 2006. As such, no audit has been conducted for these companies in the period ending 24 February 2018.

The preliminary announcement has been prepared on a going concern basis consistent with the basis of preparation of the statutory financial statements for the period ended 24 February 2018.

The preliminary announcement does not constitute the statutory financial statements of the Group within the meaning of Section 434 of the Companies Act 2006.

The preliminary announcement has been agreed with the Company's auditor for release.

` MORSES CLUB PLC

NOTES TO THE PRELIMINARY RESULTS - continued

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

2. PROFIT BEFORE TAXATION

Profit before tax is stated after charging:

3. TAXATION

The standard rate of corporation tax applicable for the period ended 24 February 2018 is 19% (2017 - 20%).

Finance Bill 2016 provides that the tax rate will reduce to 17% with effect from 1 April 2020. The effect of this proposed tax rate reduction will be reflected in future periods.

MORSES CLUB PLC

NOTES TO THE PRELIMINARY RESULTS - continued

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

4. DIVIDEND PER SHARE

Subject to shareholder approval at the Annual General Meeting on 26 June 2018, the Board proposes to pay a

final dividend of 4.8p per ordinary share payable on 27 July 2017 to all shareholders on the register at the

close of business on 29 June 2018.

5. EARNINGS PER SHARE

Diluted earnings per share calculates the effect on earnings per share assuming conversion of all dilutive potential ordinary shares. Dilutive potential ordinary shares are calculated for awards outstanding under performance related share incentive schemes such as the Deferred Share Plans. The number of dilutive potential ordinary shares is calculated based on the number of shares which would be issuable if the performance targets have been met.

MORSES CLUB PLC

NOTES TO THE PRELIMINARY RESULTS - continued

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

6. GOODWILL

Allocation of goodwill to cash generating units

Goodwill is tested annually for impairment and is carried at cost less accumulated impairment losses. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). Upon acquisition the activities of the acquired entities are closely aligned to those of the Company and are deemed to have been integrated rather than remain as separate CGUs.

Key assumptions used in goodwill impairment review

Determining whether goodwill is impaired requires an estimation of the discounted future cash flows of the Company using a discount rate of 11% and a terminal value based on a minimum future growth rate of 2%. The Group has conducted a sensitivity analysis on the goodwill impairment assessment and believes that there are no reasonably possible changes to the key assumptions in the next year which would result in the carrying value of goodwill exceeding the recoverable amount. The recoverable amount has been calculated using the value in use method. Goodwill is tested for impairment annually or more frequently if there are indications that goodwill might be impaired. The key assumptions used in the value in use calculation are the growth rates and the discount rates adopted. The growth rates are based on the most recent financial budgets approved by the Group Board for the next three years. The discount rates which reflect the time value of money and the risks specific to the financial services sector are sourced from and independent 3rd party.

MORSES CLUB PLC

NOTES TO THE PRELIMINARY RESULTS - continued

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

7. OTHER INTANGIBLE ASSETS

8. TRADE AND OTHER RECEIVABLES

MORSES CLUB PLC

NOTES TO THE PRELIMINARY RESULTS - continued

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

8. TRADE AND OTHER RECEIVABLES - continued

Amounts receivable from customers

The credit risk inherent in amounts receivable from customers is reviewed under impairment as per note 1 and under this review the credit quality of assets which are neither past due nor impaired was considered to be good. The above analysis of when loans are due is based upon original contractual terms which are not rescheduled. The carrying amount of amounts receivable from customers whose terms have been renegotiated that would otherwise be past due or impaired is therefore £nil (2017- £nil).

An analysis of movements on loan loss provisions is provided below:

There has been no material change in the average effective interest rate used for consumer credit during the period to 24 February 2018.

MORSES CLUB PLC

NOTES TO THE PRELIMINARY RESULTS - continued

FOR THE 52 WEEK PERIOD ENDED 24 FEBRUARY 2018

9. DEFERRED TAX

10. ULTIMATE PARENT COMPANY

Up until 21 February 2018 the Company was a 51% subsidiary of Hay Wain Group Limited (formerly Perpignon Limited). Hay Wain Group Limited's shareholding reduced on 21 February 2018 to 36.8% and as such it no longer holds a controlling interest in the Company. From 22 February 2018 the directors consider there to be no ultimate parent company.

Alternative performance measures

This Annual Report and Financial Statements provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards. We believe these APMs provide readers with important additional information on our business. To support this we have included a reconciliation of the APMs we use where relevant and a glossary indicating the APMs that we use, an explanation of how they are calculated and why we use them.

Reconciliation of statutory PBT to adjusted PBT and adjusted PBT underlying HCC

Alternative performance measures - continued

Reconciliation of Cash from operations to Cash from operations (excluding investment in loan book)